Gaping holes need filling for infrastructure finance

Brexit means the UK will lose access to the European Investment Bank (EIB), an unintended and little-understood consequence of the UK vote to leave the EU. Given that the EIB has invested £32bn in UK projects since 2011, with £6bn of that in 2016 alone; the potential gaping hole in infrastructure finance needs urgent action.

European Investment Bank - Will Waller

Brexit may not happen until at least 2019, but the issue is more pressing. Following the trigger of Article 50 in March 2017, a freeze on new long-term loans to the UK was put in place. Only three UK projects have been signed off since, and none have been financed by the EIB since June. 

The role of the EIB

In total the bank has outstanding loans in the UK worth more than £48bn. Over 80% of these are in key infrastructure sectors - including energy, water, transport and telecommunications. High profile examples include:

  • £525m for the Beatrice wind farm off the coast of Scotland
  • £700m for Thames Tideway
  • £1.5bn for Crossrail 1

The value of EIB loans to UK infrastructure in 2016 was commensurate with approximately 25% of infrastructure construction output in that year – a significant overall contribution. 

Why is the EIB so pivotal in the first place? The answer is simply because it exists and, being convenient, has ‘crowded out’ other sources of finance. 

In particular, it has become an important part of the funding model for private infrastructure development. Weaning UK clients off the EIB’s readily-available finance is more important than ever if the UK’s infrastructure pipeline is to be delivered expediently. 

Weighing the options for infrastructure finance

1. The UK could remain a member of the EIB. 

However, this is unlikely as the rules state that members must also be members of the EU. Changes would need unanimous agreement by all 27 of the remaining EU countries. Given the current state of negotiations, this is unlikely, so other alternatives are required. 

2. The formation of an alternative (UK) investment bank. 

The UK has experience of setting up infrastructure-focussed national investment banks. The Green Investment Bank (GIB) was capitalised with £3bn in 2011, to stimulate green infrastructure investment. The scale is much smaller than the EIB. By the end of 2015, the bank had invested over £2bn in 60 projects. The sale of the GIB to Australian bank Macquarie was controversially completed this year, demonstrating investor interest in these types of project finance bodies. 

The idea of a new UK Investment Bank (UKIB) to take up the slack from the EIB has been widely mooted. The National Infrastructure Commission (NIC) said it would study the idea of a state-sponsored UK infrastructure bank, but there are several reasons why this is not straightforward: 

  • It will require scarce capital, estimated by the Treasury to be £15bn - £20bn.
  • It would take several years to set up. KfW, the German government’s development bank, has taken the best part of a decade to achieve scale. 
  • The UKIB would be on the government’s balance sheet, unlike the EIB, expanding the government’s stock of debt just as it is trying to reduce the deficit. 
  • The UKIB would carry a greater risk profile, being relatively concentrated geographically. This is in contrast with the EIB, which is massively diversified across a whole continent.    

However, the EIB, GIB, KfW and also the Canada Infrastructure Investment Bank all show that infrastructure investment banks can be hugely successful in financing national infrastructure at scale. The setup of a UK entity is a big challenge, but not an insurmountable one.  

3. Alternative sources of finance

There are other options. The Chancellor Philip Hammond has talked about expanding UK government financial support to infrastructure, in the form of a broader UK guarantee scheme, whereby government underwrites lending to infrastructure projects. Infrastructure bonds or gilts could also be used as alternative sources of finance. Could Chinese and other international development banks and investors also have a key role to play?

The importance of private finance

Infrastructure has a disproportionate reliance on private finance, with at least 50% of the £500bn national infrastructure and construction pipeline reliant on it. 

However, relatively limited availability and high cost of private infrastructure finance reflects the aversion investors have to delivery risk. The £10bn Moorside nuclear new build project was recently delayed to the late 2020s after private investors pulled out, citing construction risk. The loss of the EIB threatens to make this worse, not because it is an alternative to private finance itself, but because a lot of private finance depends on EIB involvement to make deals work. 

Filling the gap

Whilst there is no easy or obvious solution for accessing affordable private infrastructure finance in the UK, filling the gap left by the EIB is possible. Collaboration of all parties to the deal map is required to make projects more investable:

  • Do project sponsors and the supply chain need to continue to deliver greater certainty of outcome so that projects are more predictable and investable?
  • Would better value be delivered if the government shared some of the risk associated with project delivery?  
  • Through early involvement with project development, could investors work with other stakeholders to shape more investable projects?

The reality

Whilst loss of access to the EIB may seem a remote problem, there are already signs of a slowdown in infrastructure construction. A shortfall of new contracts replacing completed work means that sentiment is the weakest it has been for nearly five years.  

There is no overnight solution for the loss of the EIB and fixing financing will require action by investors, clients, constructors and government alike. Infrastructure has a key role to play in the UK’s competitiveness but, whilst preferential access to finance is constrained, our industry cannot fully play our part in driving the UK forward.  

The challenge of replacing the EIB is just one of the thousands of initiatives that government will have to take to replace capabilities previously provided through the EU. The fact that the loss of access to the EIB is already having an impact on the market, highlights the urgency behind finding alternative sources of project finance and making projects as investable as possible, to make up for it.